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Broadcom Chief Warns of Slowing Chip Sales Growth

Internet: Henry Nicholas' comments at a San Francisco technology conference send the Irvine firm's shares down 11%.


For the first time since Broadcom Corp.'s soaring public offering two years ago, the company's exuberant chief executive delivered a bitter pill to analysts and investors Wednesday, warning that the chip maker is experiencing slower sales growth than previously expected.

The warning, delivered at an informal technology conference in San Francisco, surprised some in attendance, who apparently bolted from the event to respond in the marketplace. Shares of the Irvine chip maker fell promptly, ending the day off 11% at $82.67 on Nasdaq. Trading was more than double the average volume, at 29.6 million shares.

"Right now we're still looking at quarter-on-quarter growth, but there's the potential for that growth to be a little more modest than we originally anticipated," Henry T. Nicholas III said at the Banc of America Securities technology gathering.

Broadcom is the No. 1 maker of semiconductors for cable modems. But the networking chip market has been buckling under Cisco Systems Inc.'s fourth-quarter earnings report Tuesday, which missed analysts' expectations for the first time in 11 years. Cisco, the leading computer-networking equipment maker, is Broadcom's third-largest customer. So Broadcom's revised outlook was not entirely unexpected.

But for Broadcom, which has weathered the throes of a volatile market with more outward bravado than many of its competitors, the warning marked a conspicuous turnaround.

Some customers have already delayed or canceled orders, Nicholas said. He declined to say how long the orders have been delayed. Broadcom is also concerned that changes in Gateway Inc. management could endanger an agreement between the two companies.

Several analysts remarked that it was odd that Nicholas would issue a warning in the rather informal setting of an investors conference and while the markets were still open for trading. The more common approach is to use a news release and conference call to reach the whole community at once, although the conference was broadcast live on the Internet.

"It was like this backhanded warning, without formally changing the guidance," said Credit Suisse First Boston analyst Charles Glavin. "At first people were asking each other, did he really lower the guidance?"

Just hours before Nicholas' comments, the investment banking firm WR Hambrecht had lowered its 12-month price target on Broadcom from $200 to $125 per share. "The fact that they are lowering their guidance was very much within our expectations," Hambrecht analyst Jim Liang said.

In addition to fallout from Cisco's slowdown, Liang predicted additional pressure on Broadcom in the cable modem market, where Broadcom culls about 25% of its revenue.

"We're still in the process of assessing Cisco," Nicholas said.

Last month, Broadcom said it expected first-quarter revenue to rise 22% to 23% from the fourth quarter and to double for the full year. Broadcom had fourth-quarter revenue of $376.1 million and full-year sales of $1.1 billion.

Nicholas said he's still hopeful the company will be able to double its revenue this year. He said he's not sure whether more of the growth will come in the first half or the second half.

An IBES International Inc. poll of three analysts had an average estimate of $459.6 million in revenue for the first quarter. For the year, an IBES poll of four analysts had an average estimate of $2.23 billion.

Nicholas said the expected growth is a result of the company's expansion. Last month, Broadcom agreed to buy chip maker ServerWorks Corp. for as much as $1.87 billion in stock to add chips used in computers that run Web sites and corporate networks.

While the purchase drew praise from analysts, it was also suggested that ServerWorks' profitability obscured some of the other challenges Broadcom faces in other markets. Although Glavin agreed that it is a great acquisition, he said it is masking the much slower growth in other markets. "Our near-term outlook on Broadcom is probably at risk," he said.

The change in Gateway's management has called into question an agreement with Broadcom to work together on developing home-networking products, Nicholas said. The companies said in November that they would make products to link televisions, personal computers, music players and other devices to the Internet and to each other.

Gateway, the No. 2 direct seller of personal computers, said last week that Chief Executive Jeff Weitzen quit. The company named founder and Chairman Ted Waitt to succeed him. A day later, Waitt named a new chief financial officer and other executives.

"That's one area where we were caught off guard," Nicholas said.

Cisco shares fell $4.69 to $31.06 on Nasdaq. Gateway fell 32 cents to $20.43 on the New York Stock Exchange.


Times wire services contributed to this report.


Rough Ride

Shares of Broadcom Corp. have been on a roller coaster ride this year, climbing through much of January before hitting the skids.

Wednesday: $82.81, down $9.69

Source: Blooomberg News

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